At 6:15 p.m. on Friday, Feb. 2, 2018, the Federal Reserve Board of Governors announced an enforcement action against Wells Fargo that imposed a novel condition on the bank — it would be prohibited from growing beyond $1.95 trillion of assets, its size as of Dec. 31, 2017.
The unprecedented move was the central bank’s long-awaited response to a litany of scandals that had embroiled the San Francisco-based bank over the prior several years. The most visible of those scandals related to bank employees opening millions of unauthorized credit cards and checking accounts under the names of unknowing customers, but other revelations about abuses in the bank’s auto and mortgage units further tarnished its public image.
The Fed said in its enforcement action that the asset cap was imposed in response to “widespread consumer abuses and other compliance breakdowns” at the bank, and would remain in place “until it sufficiently improves its governance and controls,” casting a pall of uncertainty over the bank’s growth prospects indefinitely.
But that night five years ago, then-Wells Fargo CEO Tim Sloan attempted to quell these concerns. In a call with analysts, he downplayed the open-ended nature of the consent order and struck a hopeful tone about the bank’s ability to meet the Fed’s requirements for removing it, and said the bank might resolve the Fed’s concerns by Sept. 30 of that year.
“I hope we do it sooner,” Sloan said on the call. “And then the Fed will take a look at it and respond. So, we’re on a fast track here, and we’re looking forward to making the improvements that are necessary.”
That May, Sloan said the bank received “very detailed feedback” from the Fed and now expected the asset cap to last through the “first part of 2019.” As 2019 kicked off, Wells Fargo pushed the deadline to after year-end. Sloan unexpectedly stepped down as CEO in March 2019, and two weeks later the company stopped speculating about when the asset cap might be lifted.
Sloan, reached at the private equity firm Fortress Investment Group, where he has worked since 2020, declined to comment on the asset cap or his time at Wells Fargo.
The consent order and the asset cap remain in place today, with no end in sight. While the asset cap remains unchanged, Wells Fargo has evolved and adapted to it over the past five years. Wells’ current CEO, Charlie Scharf, who joined in October 2019, has been credited for his laser focus on fixing the bank’s risk management issues once and for all, repeatedly emphasizing that Wells Fargo is a “different bank today,” with new leadership, better oversight and considerable progress in tackling outstanding issues.
When asked for a comment, a Wells Fargo spokesperson shared: “We are a different company today, having made significant progress toward enhancing the customer experience, delivering innovative products and services, and improving our risk and controls. We know there is more work to do and we are confident that we have the right people and plans in place to transform this company.”
Scharf cautioned that there’s likely to be “setbacks” despite that progress. One such setback came in September 2021, when regulators fined Wells Fargo $250 million and cited continued problems in its mortgage division.
Then, in December, a $3.7 billion settlement with the Consumer Financial Protection Bureau came with a vague warning from Director Rohit Chopra. While the settlement laid a path forward for the bank to resolve pending issues with the CFPB, Chopra also said the bank hadn’t been quick enough in its overhaul.
“As regulators, we must collectively consider whether additional limitations need to be placed on Wells Fargo,” he said.
The promise of progress and a simultaneous threat of further regulatory penalties to come are emblematic of Wells’ life under the asset cap: Even as Wells Fargo crosses consent orders off its lengthy regulatory to-do list, no one outside the Fed and the bank really knows with any specificity whether Wells is getting any closer to the finish line with the Fed’s asset cap. The inner workings of consent orders are confidential supervisory information, so they’re not available to the public. And for that reason, there’s no way to know with any certainty how close or far away Wells is to meeting the Fed’s demands, or even what those demands are.
“The asset cap will go away when the regulators say it goes away and not a moment before,” Piper Sandler analyst Scott Siefers said, adding that the “big mistake that we all made was to try to put our own timetable.”
But while the asset cap has endured far longer than most initially thought, it can’t be permanent. Something will have to give.
Either Wells will eventually make sufficient changes to its internal controls and risk management and appease the Fed, or the Fed will decide that the bank itself must be restructured.
That could be through a “serious house cleaning” or shutting down business lines for Wells Fargo, said Mayra Rodríguez Valladares, an industry risk consultant and managing principal at MRV Associates.
“If that doesn’t wake them up, I don’t know what on earth would,” Rodríguez Valladares said.
Then there’s the nuclear option. Dennis Kelleher, head of the consumer advocacy group Better Markets, said breaking up the bank “clearly still remains on the table.”
“The fact that five years has gone by and they haven’t done it clearly suggests that regulators should start thinking about whether or not they need to break up that bank to bring it into compliance,” Kelleher said.
The silence from Wells and the Fed is typical for enforcement actions, which tend to be issued and terminated with little fanfare and minimal description of what transpired to warrant a penalty or its removal. They also aren’t typically assigned an expiration date, so it’s not uncommon for issues to take several years to be resolved — the Fed’s 2013 enforcement action against JPMorgan Chase for the London Whale fiasco, for example, was ultimately terminated in 2019.
At best, the Fed will release some information from a third-party review of Wells Fargo’s activities after the enforcement action is resolved. It agreed to that modest level of disclosure only after being pressed by Sen. Elizabeth Warren, D-Mass., one of the bank’s biggest critics.
“They were basically forced, due to public and political pressure, to do this,” Kelleher said.
Consumer advocates are not the only ones frustrated with the Fed’s level of disclosure around such a precedent-setting enforcement action. David Zaring, a professor at the University of Pennsylvania’s Wharton School of Business who focuses on financial regulation and administrative law, said the Fed’s handling of the asset cap has been “problematically untransparent.”
From the outside, Zaring said, the Fed’s justification for the cap appears to lump a string of scandals together under the umbrella of poor risk management. While Wells Fargo’s practices were clearly deficient, he said, what constitutes good or bad risk management is subjective, making it a dangerous legal precedent for enacting a control as harsh as an asset cap.
“The problem is internal controls and risk management practices, and that is serious. If a really large bank doesn’t have effective internal controls in place, then that can be systemically risky,” he said. “But it’s also the kind of thesis for a consent order that any bank regulator can impose on any financial institution at any time.”
There is little doubt that the asset cap has had an enormous financial impact on Wells Fargo. While its competitors have grown by hundreds of billions of dollars over the past five years, Wells Fargo has stayed flat, and its market capitalization has fallen sharply.
It ties into a lot of the questions that have been signaled since the financial crisis about too big to fail, too big to manage, too big to supervise.
David Zaring, a professor at the Wharton School of Business
Enforcement actions and financial penalties have long been a way for bank supervisors to get banks’ attention and compel them to take specific actions, said Sean Vanatta, a professor of U.S. economic and financial history at Scotland’s University of Glasgow. But where the asset cap is truly novel, Vanatta explained, is in the Fed’s ambition to repair a broken culture at a bank as large and sprawling as Wells Fargo.
“It ties into a lot of the questions that have been signaled since the financial crisis about too big to fail, too big to manage, too big to supervise,” he said. “How do you take action against a firm of this size that’s meaningful?”
In the absence of any objective measure of Wells’ progress, frustration is mounting both among those who want to make sure the issues at Wells Fargo are sufficiently addressed and those who are concerned about the fairness of the process.
Greg Baer, president and CEO of the Bank Policy Institute, a trade group that represents large commercial banks, pointed to Wells Fargo’s substantial progress thus far and called on the Fed to either provide more information about where the bank stands or remove the cap altogether.
“Without doing so, the question of how preventing Wells Fargo from opening additional branches or underwriting additional municipal bonds is making it safer and sounder remains unanswered,” he said. “As an industry, all banks and financial institutions will benefit from the lens of greater regulatory transparency in actions such as these.”
Despite the precedent-setting nature of the asset cap and the potential future ramifications for other banks, the calls for more information about what is going on behind the supervisory curtain are likely to go unanswered, said
Karen Petrou, managing director of the Washington, D.C.-based consulting firm Federal Financial Analytics.
“This is one institution,” Petrou said. “It’s not like multiple enforcement access, where you can put facts together and provide a useful policy or guide without providing proprietary information on a single institution. I don’t think that’s possible.”
‘A very clear message’
The Wells Fargo asset cap is the first time the Fed has placed this type of total restriction on a bank’s growth, so for that reason alone the agency is in uncharted waters.
But just how far the action deviates from the longstanding traditions of bank regulation and supervision is unclear. Petrou said growth restrictions have been a common tool for bank regulators, albeit typically with a much narrower focus. Traditionally, she said, they have been used as a means for encouraging banks to increase capital levels.
“It’s not that asset growth caps are unprecedented. They’re common, actually, for undercapitalized institutions,” Petrou said. “That this was done for various consumer and control issues; that was the unprecedented part and it’s an important precedent for any future incidents in which a banking organization is viewed as extraordinarily wrong on critical good-practice issues.”
Vanatta said the behavior of bank directors has been a key component of bank supervision since the creation of the Federal Deposit Insurance Corp. in the 1930s. With the government on the hook for making depositors whole if a bank fails, regulators had a new vested interest in monitoring bank management practices and keeping banks from failing in the first place, he said.
This interest deepened with the passage of the Bank Merger Act of 1960, which made bank management a prime criterion for regulators to consider when weighing a potential combination of banks, Vanatta said.
“In that sense, the federal government is always interested in evaluating management and in that sense evaluating risk management when considering bank growth,” he said. “It might stop bank growth if it finds that management is insufficient and risk management isn’t sufficient.”
Yet the reasons for intervention and the mechanisms for measuring good and bad management have changed significantly during the past century. Initially, supervision focused primarily on loan quality, portfolio construction and use of credit, Vanatta said, with managers being assigned grades based on the discretion of individual supervisors.
But over time, regulators have become increasingly cognizant of risks to the financial system as a whole, and, as a result, supervision has become more nuanced, more sophisticated and more complicated, Vanatta said.
The size of megabanks like Wells Fargo, which have been deemed systemically important and too big to fail, has raised the stakes of supervision still further, he said.
“Supervision, as a set of practices, came to exist in a world of unit banking, where the banks were small and the government was big. Now, the government is still big, but the prospect of a bank the size of Wells Fargo failing is terrifying,” Vanatta said. “Part of what the cap signals is there is a problem with bigness, that restraining growth will help the government understand these huge banks, to evaluate these huge banks, and, ultimately, to trust these huge banks.”
What Vanatta calls a natural evolution of supervision practices, Zaring describes an expansion away from the traditional principles of bank regulation. In the Wells Fargo asset cap, he sees a continuation of the Fed’s effort to make sure banks are not only financially sound, but morally sound as well.
“Maybe this order not to grow could encourage the bank to take a different approach to internal culture, and if that’s the case, that’s new,” Zaring said. “It’s consistent with the Fed’s interest in this area, but it often seems to me the Fed’s interest in ethics regulation was to … try to outsource good conduct on banks themselves and encourage them to make sure that they get rid of bad apples, they don’t cut corners, and do that by embracing an ethical banker paradigm.”
That paradigm, Zaring said, aligns with an emerging view that because banks are given a government franchise to take insured deposits and conduct financial transactions, the government gets a say in exactly how they go about doing that.
This raises a fundamental question of whether banking is a profession or a business, he said.
“Members of various professions have ethics codes … doctors are supposed to follow the Hippocratic oath, lawyers are officers of the court, they have duties to their clients. Professions can have ethical codes that require certain kinds of conduct that bite in some ways,” Zaring said. “Not to say business ethics are unimportant at General Motors, but nobody thinks that the CEO of General Motors has a particular duty to their clients, the people they sell cars to. They have to follow the law, but there’s not some ethical obligation over and above that.”
Regardless of whether the asset cap was a slight deviation from past regulatory practices or a substantial one, many in and around the supervisory field say the action was commensurate with Wells Fargo’s wrongdoing.
“This was a pretty serious offense by this institution, and unprecedented itself. Billing false accounts is pretty serious,” said Thomas Hoenig, the former president of the Federal Reserve Bank of Kansas City, “The Fed felt an obligation, and I think there was pressure on the Fed and others, to address this in a very firm way.”
Hoenig, who is now a distinguished senior fellow with the Mercatus Center, said the Fed Board of Governors needed to send “a very clear message that this was not acceptable,” to both Wells Fargo and the banking sector more broadly.
“It does give a clear signal to the banks to pay attention. Pay attention to their culture, pay attention to their incentive structures,” he said. “That is the message given and probably the message received more broadly than just for one large institution.
It was probably received by all large institutions. That was probably what the Fed intended and in that sense, it served its purpose.”
Since the cap was imposed, Wells Fargo’s share of deposits nationally has slipped compared with two main rivals. Its market capitalization has also fallen almost 50% since the asset cap was put in place, from nearly $300 billion at the end of 2017 to $157 billion at the end of the year, according to S&P Global Market Intelligence.
JPMorgan Chase’s market cap has gone up a bit over the same time period to $393 billion, and Bank of America’s has dropped 12% to about $266 billion.
While the asset cap has been far from fatal, it’s given the bank less room to expand in profitable businesses like capital markets, where meeting the trading and financing needs of corporations, governments and other institutional clients requires more assets to be held on a bank’s balance sheet.
“Having to manage under that cap really kind of handcuffed the flexibility that they have with their balance sheet and their ability to engage in certain businesses,” Siefers said.
Scharf regularly says the asset cap isn’t a constraint on Wells Fargo’s ability to make more loans. As demand for loans started to pick up in 2021, Scharf told analysts the bank was “as open for business as anyone on the asset side,” since it could make adjustments to ensure it could meet clients’ borrowing needs.
“When you’re out, you know, hustling for business, we’re certainly able to fulfill their needs,” Scharf said in October 2021.
In December, Scharf said each business line at Wells Fargo had “opportunities to grow” and was executing on them, a contrast from past years in which growth “wasn’t the focus of the company.”
The bank has launched Wells Fargo Premier for wealthier customers. It has sought to build out its investment banking operations, leading to some success in increased dealmaking. And it’s rolled out a new suite of credit cards, an area that Scharf — a former JPMorgan Chase retail banking head and Visa CEO — said had long been underperforming for Wells.
“There’s an energy and enthusiasm in the company that certainly wasn’t there three months ago, and it’s because we’re bringing things to market,” Scharf said at a conference in December.
At least one regulator has noticed Wells’ efforts to grow and is not pleased. Chopra said he is worried the initiatives are a distraction from the bank’s critical work of cleaning up its internal controls.
“We are concerned that the bank’s product launches, growth initiatives, and other efforts to increase profits have delayed needed reform,” the CFPB director said.
For all its attempts at growth in recent years, Wells Fargo has also downsized in some areas and sold off entire businesses. These moves are part of an effort to simplify and focus on the services that its core customers need.
The bank exited the student loan business and sold its $10 billion portfolio. It sold its Corporate Trust Services division for $750 million. It sold its Canadian direct equipment finance division to Toronto-Dominion Bank. And it sold its asset management division for $2.1 billion.
Scharf has said the exits were driven by executives’ view of what Wells Fargo should look like in the long term, not by the asset cap.
“To the extent that it helps us with the asset cap, that’s certainly a benefit,” Scharf said in January 2021. “But that was not the lens with which we viewed this.”
The asset cap’s more notable impact has been on Wells Fargo’s deposits. Soon after it was put in place, Wells Fargo started eschewing some types of less-desirable deposits — such as those from large institutions that typically garner higher interest rates — in order to make ample room for consumer deposits and “operational” funds from commercial clients, which are the day-to-day cash that companies need for payroll and other expenses.
Prioritizing some deposits over others may have been an undesirable consequence of the asset cap — particularly during the early stages of the pandemic when deposits flooded into the banking system — but it may also have prepared Wells Fargo for an increasingly competitive deposit environment as banks face pressure to pay depositors more as interest rates rise.
Wells Fargo’s deposit base is more consumer-oriented than almost any other large or regional bank, according to a research note from UBS analyst Erika Najarian. Since consumers are far less demanding of higher rates than commercial clients, Najarian and other analysts expect Wells Fargo to see more muted deposit cost pressures.
“The results from our deposit quality scorecard support our high-conviction positive stock view” on Wells Fargo, Najarian wrote.
‘A marathon rather than a sprint’
Scharf says he spends more than half his time on ensuring Wells Fargo teams are on track in building the type of risk infrastructure that regulators want. That’s not an easy task, given the sheer amount of compliance breakdowns that led regulators to issue the asset cap.
At the center of many of Wells Fargo’s problems was the lack of an adequate company-wide risk management program — one that tracks compliance breakdowns at each business line and then reports risks to top executives.
Ultimately, the Fed’s 2018 order calls on Wells Fargo to implement a risk management operation “commensurate with the size and complexity” of the bank.
Wells Fargo executives “feel confident that we don’t just understand the work that has to get done, but that we’ve completely changed our approach,” Scharf told analysts in June. It’s a “huge, huge task” that requires developing extensive plans, hiring staff to implement them, building new technologies and ensuring the improvements can last over time, Scharf said.
“You don’t just build it. You need to have months and months’ worth of sustainability,” Scharf said. “We need to do our own [quality assurance] inside for all the different lines of defense. And then the regulators need to come and do that.”
There’s a case to be made that Wells Fargo — someday, once its regulatory troubles are behind it — could have a top-of-the-line risk management program that quickly prevents any hint of similar issues in the future.
“If by going from worst to first, so to speak, through this trial by fire, we can come up with a new standard for what good controls are, then it will have served its purpose in a sense,” Siefers, the analyst, said.
Investors remain confident in Scharf’s ability to fix Wells Fargo and put the asset cap behind it, but there’s “always going to be some sort of stopwatch,” Siefers said.
“As long as we keep moving forward, I think the market understands this is a marathon rather than a sprint,” Siefers said.
Gerard Cassidy, an analyst at RBC Capital Markets, said the questions for Scharf and his team may start to pile up if the end in sight isn’t clear two years from now.
“Right now, I think everybody’s giving them the benefit of the doubt. They’re doing everything possible,” Cassidy said. “If it continues to drag on, that may change.”
The efficacy of the asset cap as a supervisory cudgel is also somewhat inconclusive. The cap has made life difficult for Wells Fargo and led to a host of changes at the bank, though measuring cultural attitudes is inherently subjective. On the other hand, the fact that the Fed has taken such a drastic step has served as something of a warning to the banking industry at large.
“Pretty much every bank — certainly those that are watching this from the outside — would go to the ends of the earth to make sure it did not happen to them,” Siefers said.
Whether asset caps ever get used again depends on individual circumstances, but Hoenig said the action will likely be reserved for the most egregious of violations.
“If it came up again, something very similar to this, they would do it again,” Hoenig said. “It would be more than just a civil money penalty. It would be something like capping growth or removing certain officers. Whatever is found to be the source of the problem, they would want to put pressure on that source to correct it.”
The Fed would probably be fine with a perpetual asset cap until Wells Fargo shows it can be a good corporate citizen. It’s not difficult for the Fed to keep the asset cap on. It’s not using up federal resources; it’s just there.
Todd Phillips, a former FDIC attorney and current principal at Phillips Policy Consulting
Hopes that Wells Fargo could address the issues underlying the cap in a matter of months have proved to be misguided. Enforcement actions take time to resolve, and cultures can take even longer to turn over.
Few expect the cap to make it to 10 years, but that does not mean the bank should expect it to die of old age, said Todd Phillips, a former FDIC attorney and current principal at Phillips Policy Consulting.
“The Fed would probably be fine with a perpetual asset cap until Wells Fargo shows it can be a good corporate citizen,” Phillips said. “It’s not difficult for the Fed to keep the asset cap on. It’s not using up federal resources; it’s just there.”
Because of the size of Wells Fargo, the nature of its underlying scandals and the precedent of the asset growth cap, Vanatta said whenever the Fed lifts the enforcement action, the move will be scrutinized. With that in mind, it will not let Wells Fargo off the hook until it’s certain all the bank’s issues are behind it.
“Supervisors know the lifting of the consent order will be momentous,” Vanatta said. “It will be a really important moment, and they want to get that moment right, so that it sends the right message and so they feel confident that it’s not going to surprise them a year, two years, three years later.”